In a market model with two time instants (t=0) and (t=1) and risk-free interest rate (r), consider

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In a market model with two time instants $t=0$ and $t=1$ and risk-free interest rate $r$, consider

- a riskless asset valued $S_{0}^{(0)}$ at time $t=0$, and value $S_{1}^{(0)}=(1+r) S_{0}^{(0)}$ at time $t=1$.

- a risky asset with price $S_{0}^{(1)}$ at time $t=0$, and three possible values at time $t=1$, with \(a

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a) Show that this market is without arbitrage but not complete.

b) In general, is it possible to hedge (or replicate) a claim with three distinct claim payoff values $C_{a}, C_{b}$, and $C_{c}$ in this market?

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Introduction To Stochastic Finance With Market Examples

ISBN: 9781032288277

2nd Edition

Authors: Nicolas Privault

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Question Posted: Feb 25, 2024 08:00 AM

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In a market model with two time instants (t=0) and (t=1) and risk-free interest rate (r), consider

Question:

S() s() (1 + a), s() (1+b), S()(1 + c).

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a We need to search for po...View the full answer

Introduction To Stochastic Finance With Market Examples

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